“The Sky is Falling” on California Manufacturing, Worst since February 2009, Might Kick Regional Economy into Recession

“The wheels have come off this quarter.”

“The sky is falling” is the perfectly-on-the-mark technical expression by the good folks at the Institute of Applied Research, which publishes the Purchasing Managers’ Index for the Inland Empire – the only manufacturing PMI in California. The Inland Empire is the third-most populous region in California and a big manufacturing and warehousing hub that includes the city of San Bernardino which filed for Chapter 9 bankruptcy in 2012.

So the Inland Empire is a good gauge of manufacturing in the rest of California.

Back in 2009, during the depth of the Financial Crisis, the PMI report for February had produced a terrible score of 34.7 (below 50 = contraction). But in March, the index jumped to 45.2, still in a sharp contraction, but less catastrophic than in February. So the Institute of Applied Research endowed its March PMI report with the title, “Perhaps the Sky is not falling.”

Now we’re back – right between these two Financial-Crisis months. Only this time, it’s going in the wrong direction.

The IAR already issued a warning in its September report, with a hesitation. “We are not yet ready to say that ‘the sky is falling.’”

At the time, the Inland Empire PMI had dropped to 44.1, below 50 for the second month in a row. But the report pointed out that “the sky is falling” doesn’t apply until the index is below 50 for three months in a row; given the index’s volatility, it takes that long to establish a trend of contraction.

So that third month below 50 promptly arrived in October – “for unknown reasons, the worst month in memory,” as one of the executives on the panel called it.

Then in November, there was an uptick above 50, in line with the volatility of the index, or perhaps due to a statistical quirk – because based on the just released December report, the sky is now truly falling.

The PMI for December plunged to 42.1, the lowest level since the above mentioned dark days of February 2009.

The report pointed out that the national manufacturing PMI released on January 4 had also plunged to the worst level since 2009. And the report then linked the manufacturing PMI to the overall economy:

A PMI below 43.1, over a period of time, generally indicates a contraction of the overall economy, and a figure below 50 indicates weakness in the manufacturing sector. This month’s PMI is below both benchmarks. If the index remains this low for the next two months, a trend of contraction in the Inland Empire economy will have been established.

This is how manufacturing – though it only represents a small portion of the services-oriented economy – drags down the overall economy.

Everything was crummy in the report. The two crucial components, New Orders and Production, plunged below 40 – to 37.9 and 39.4 respectively – and the Employment index plunged nearly eight points to 40.9. Inventories also dropped, as did Commodity Prices and Supplier Deliveries, a measure of how busy suppliers are, and they aren’t very busy apparently.

By now, optimism about future general business conditions affecting their company in the coming quarter is fading: 28% of the executives said the economy would get even weaker and 59% said it would stay the same – the “same” being a manufacturing sector that is in the worst slump since February 2009 and is now feverishly trying to dodge the falling sky. Only 13% said it would get stronger, down from 31% in November.

Their individual comments included the good: “December was the best sales/shipment record in 7 years”; the bad: “Slight increase in orders but still very slow”; and the ugly: “The wheels have come off this quarter. Bookings are off 50%. We are going to have a serious lay-off in January if things don’t pick-up.”

The report cautioned that there is “often” some seasonality in the index with a weakening trend in November and December. But wait… November had been the best month since July, and the only month in the past five above 50! So the report warned that the decrease in December was “especially sharp,” which doesn’t leave all that much hope that seasonality will just change course and restore the rosy scenario that folks clung to before everything came unglued starting last summer.

The report concluded:

In summary, this month’s figures mirror the national stats reflecting weakness in the manufacturing sector. This is especially troubling since 4 out of the 12 PMI figures in 2015 were below 50, and now the PMI is low enough to indicate difficulties for the overall economy as well as the manufacturing sector.

Other elements of the California economy are struggling too, even in Silicon Valley, as Yahoo tries to “quietly” dump its Holy Grail new-headquarters property. Read…  It Starts: Tech Trouble Mucks up Silicon Valley Real Estate Party

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  26 comments for ““The Sky is Falling” on California Manufacturing, Worst since February 2009, Might Kick Regional Economy into Recession

  1. HD says:

    Slightly off topic, Wolf: you should pace yourself with the articles because the way things are going right now, you’ll have a lot of crises to cover in 2016. Don’t crash and burn prematurely.

    Otherwise thanks for the insightful posts, although you’re not exactly turning me into a happy camper.

    • prepalaw says:


      take a week off and do nothing.

      Let Cooter and others post.

      You need a break.

      Get relaxed and take a train trip from Hauptbahnhof to Hauptbahnhof in Germany. You will return re-energized.

      • Wolf Richter says:

        Do I sound like I need to take a week off?


      • CrazyCooter says:

        Hehe, if Wolf is curious, I have narrow interests, but follow closely and am well read on those focused subjects (for an investment non- professional). I am not sure that is of much interest to the broader readership. In all fairness, I am really looking out for numero uno in a very complicated, connected world.

        My primary motivation to post is to sort of air and validate my opinions. If I really had it wrong, I think I would get some head winds. I am all macro and have no timing whatsoever, so what I think is completely useless to traders/investors (unless they are long term). I also have very atypical problem solving skills and often approach subjects from very different directions that most. But perhaps I talk fast and smart in the wrong direction and no one has the time to rebut me.

        Besides, I am kind of distracted with my fledgling PBS radio show these days … and I am finally getting traction so it is absorbing more of my time as the weeks go by. I am an introvert by nature and it is a big leap that has a lot of learning/adjusting along the way. But I really enjoy it, so I am adjusting.

        At the same time, I have a very, very interesting work project coming up as well. A close friend of mine down South has a unique background in stats/data mining and I might have a viable opportunity to play in that space for my employer. A long chain of tutorials is what I am going to start doing with my Sundays as of this weekend. If things work out we can do a pilot in early Q2 and see what management thinks. :-)

        Thanks for the thought though.



  2. B Tilles says:

    If the Inland Empire is a logistics and distribution hub for the Port of Los Angeles, can some of this weakness be attributable to the U.S.’s strong dollar policy? Or to the current malaise (I’m being polite) in China? Lastly, the residual agriculture here is also hurt by the drought.

  3. Mike R. says:

    The US decline is clearly due to the China implosion. Scores of companies are announcing series layoffs and outright closures of factories, facilities, etc.

    I don’t see anyway the US can escape a serious recession short of a huge fiscal stimulus. The recent budget bill did provide 300B in stimulus if I recollect correctly, but I doubt that will be enough.

    The next shoe to drop will be tax revenue; federal and local.

    Great reporting Wolf! Keep up the insights.

    • AsYouLikeIt says:

      State revenues are already in trouble. Take a look at Walker’s Wisconsin, Christie’s New Jersey and Brownback’s Kansas whose trickle-down governors have been handing out tax cuts and somehow thinking that the cuts will magically increase revenues. We have decades of proof that trickle-down economics doesn’t work, but their corporate constituents are very happy.

      On a back of the envelope calculation, at approximately 126,000 households in the US and a just over poverty line income of $35,000 per household, the Federal government will have to emit at least $4.5 trillion of currency through the banking system in loans or fiscally, over and above taxes, into the economy at the base level. Nope, 300B won’t do it.

      • AsYouLikeIt says:

        Oops again Wolf. Thanks for that last edit. Number of households is 123.4 million with an average of 2.54 person per as opposed to 3.19 persons per in 1970. Definitely throws kinks in my calcs, maybe should have verified first. But the poverty line income would be about $10, 000 per person or $25, 400 per household for anyone interested in correcting the math.

  4. LG says:

    No worries! Will just open more botique burger diners so all can have job security that comes with free lunch!
    Thank you President B Obama.

    • Mary says:

      You should be happy with Jeb Bush’s proposal to eliminate food stamps. No more free lunch for the working poor!

      That way we can continue funding free lunches (not to mention breakfast and dinners) for billionaires.

  5. Vespa P200E says:

    So only PMI metric is the Inland VEmpire which is more or less rows of warehouse off of I10/I60/I91 and I15 corridor and light mfg in Corona in the not so nice area to live in So Cal (more like hot pits)?

    Well that figures given the container volume which has along with Dow Transport has ben declining/ BTW – oldest and best Dow Theory says Transport Indice is precursor to Dow moves.

    • OutLookingIn says:

      Vespa – Transports yes.

      Baltic Dry Index down 96% from its financial crisis high.

      There are many more empty containers leaving west coast container ports than full ones. Ongoing collapse of the manufacturing sector.

      Container loadings out of China have collapsed.

      World trade is grinding to a halt.

      • Vespa P200E says:

        Ah but the history says:

        1. Currency Wars – call it competition to boost economy by export (Check with RMB, Euro, Yen and basket of EM)

        leads to

        2. Trade Wars – good ol tit for tat as 1 of the reason Japan started WW II was US and Dutch oil embargos as US was the #1 oil exporter with Durch oil fields in Indonesia (inevitable outcome of currency wars)

        leads to

        3. Real Wars

        We learn history so as not to repeat the history

        • OutLookingIn says:

          History also says:

          When trade goods are prevented from crossing borders –
          then armies often do.

  6. Ptb says:

    The “jobs report” just came out. Very rosey. Hmmm, how do we reconcile this with a global system that’s clearly slowing down? Lagging?
    Are these full or part time jobs?

    • Kreditanstalt says:

      “Jobs” report? Where do they get this stuff? I just don’t SEE any jobs, of any kind, on offer…anywhere.

      The only people doing well are the same ones who never suffered at all during 2008-2009: technicians/engineers/repair guys, middle management, government employees and logging…

      • AsYouLikeIt says:

        Au contraire, Kreditanstalt. Tech/engineering jobs were being exported with blue collar jobs since factories weren’t being built here. A good portion of new tech/engineering jobs in foreign manufacturing construction were supplied in-country. Only those that couldn’t be off-shored, such as PetroChem and Pharma remained. and competition for placement in these industries held down wages/salaries. Believe me, I know. First they came for the blue collar workers….

  7. TheDona says:

    The trickle down effect of manufacturing slowdowns or closures has yet to be addressed. Slowdown layoffs translates to only hiring temp or contract hires when there is an uptick. Companies can then control headcount like a water spigot. Need you this quarter but next quarter Bye Bye. Plus no benefits or severance to consider.

    The smaller plant closures effect the Mom and Pop restaurants next to the plant, that little Barber shop, the individually owned convenience store or gas station/garage, Childcare providers. All of the small businesses built around the plant to service the plant employees end up going out of business but they don’t get a severance package or unemployment benefits.

    Painfully obvious trickle down is when a Larger plant closure decimates a whole town or bankrupts a city. Real estate turns upside down and can’t sell your house because there are no buyers. What to do? Walk away from your home,take early SS, try to get on disability or just go ahead and take welfare?

    I guess Reagan’s trickle-down theory was written on “Opposite day”…he meant poverty would trickle down, not money. What a prankster.

  8. Petunia says:

    Everybody I know has been out of work once in the last five years, most at least twice. Lately, everybody I know who has lost a job has gotten another at a lower salary, a lot lower. Nobody gets severance, you are lucky to get notice, and be paid for accrued vacation time. The new jobs don’t even pay you for holidays.

    This is how the economy is functioning for people who actually work for a living. Incomes are rapidly declining while expenses are rapidly increasing. Everybody is in survival mode. None of this inspires confidence in the future. Based on this I expect the coming year to be interesting.

  9. michael says:

    I would say that things are being to look pretty “interesting” and not in a good way. I read that Jerry Brown was “concerned” that recession is close at hand and wants to maintain a sufficient “rainy day fund.” Maybe he has been reading Wolfstreet.

  10. PrototypeGirl1 says:

    A very large portion of the Tulsa population must work for the education system the streets have been empty for weeks. Ever since winter break started. drove across town from downtown on wed at 5:15 and there was no traffic. Same thing today at 4:30 coming from 177th and 41St. The malls are empty, so are the theaters. Don’t even see teenagers driving around I guess they are home playing video games, which have an amazing entertainment value as one game costs about $60, interest in the game lasts about a year and it is usable by multiple players. It seems to me the people who have dependable money here work or retired from a government job, healthcare, and religion. Interesting times.

  11. interesting says:

    “The wheels have come off this quarter.”

    i disagree and, as I’ve posted here before, in January 2015 it was as if somebody turned off a switch and the work just dried up.

    this is far far worse than 2007 which was when this happened last time.

    oddly enough i had a great December and January will most likely be my biggest invoicing month for all of 2015.

  12. GatoHead says:

    @AsYouLikeIt – We have thousands of years of proof that centrally planned economies always fail. And that’s what we have now, an economy planned by Big Government and the Fed.

    The only beneficiaries of this, as in all centrally planned economies, are the Uber-Rich (top 0.1%) and the bottom 10%. Everyone else has been squeezed out.

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